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Viacom CEO Phillippe Dauman
<p>Viacom CEO Phillippe Dauman</p>

Redstone Family Reclaims Control of Viacom in Slow Motion

(Bloomberg) -- Billionaire Sumner Redstone made a move to boot Philippe Dauman off the Viacom Inc. board. But, for now, Redstone’s once trusted associate and close personal friend isn’t going anywhere.

Dauman, 62, remains chief executive officer and chairman of Viacom, the owner of MTV, Comedy Central and Paramount Pictures, until a Delaware court rules on the legality of his ouster -- which may take four months or more. National Amusements Inc., Redstone’s theater chain and Viacom’s controlling shareholder, announced Thursday it was replacing Dauman and four other directors.

The appointment of new directors gives National Amusements enough votes on the board to change Viacom’s management, which the Redstones blame for the company’s declining stock price. Dauman, whose working relationship with 93-year-old Redstone spans three decades, has been president and CEO of New York-based Viacom for almost 10 years.

“At this point, absent court intervention, it seems that Mr. Dauman’s removal as CEO is inevitable,” said Darren Oved, head of litigation at Oved & Oved LLP, a new York law firm that’s not involved in the case. “The market’s began reacting positively to the possibility of a shakeup at Viacom.”

Viacom’s B-class shares jumped 6.8 percent to $45.05 at the close in New York Thursday. Still, the stock has lost almost half its value the past two years amid falling ad sales and earnings at the company’s cable networks, along with forecasts for a 2016 loss at the Paramount Pictures film division.

Legal Wrangling

A court decision in Delaware could take months, according to legal experts. As Viacom’s controlling shareholder, Redstone would traditionally have that power so long as he followed proper procedures and didn’t abuse his position, said Larry Hamermesh, a Widener University law professor who teaches Delaware corporate governance.

Redstone’s mental capacity and whether the billionaire properly consented to the removal of Viacom’s directors may be the focus of the case, Hamermesh said. Viacom lead independent director Fred Salerno, an ally of Dauman, has asked the court to deem the move invalid, arguing Redstone has been unduly influenced.

“The question may be whether he had the capacity to agree to the consents,” Hamermesh said. “Any look at this capacity would be limited to that issue. This case isn’t going to delve into whether he was of sound-enough mind to make a will or manage a trust.”

Salesman’s Son

Redstone was born in Boston in 1923 to a linoleum floor salesman who later owned and managed restaurants, nightclubs and movie theaters, including the first drive-in in New York, where young Sumner worked the foodstand.

In recent years, the media mogul stopped speaking at quarterly earnings calls and didn’t appear at other public company events. He stepped down from the chairmanship in February, ceding the position to his long-time protege, Dauman.

The threat of challenges to Redstone’s competency help explain the way in which National Amusements has sought to tighten the reins on Viacom. The Redstone family made its first move a month ago, removing Dauman and Viacom director George Abrams from the board of National Amusements and the family trust that will govern Redstone’s assets when the billionaire dies or is incapacitated.

Support Pillar

That eliminated one pillar of support for Dauman, who could have used the trust to retain control of Viacom. It also left Dauman’s tenure at Viacom less secure. He and Abrams rejected their dismissals, arguing Redstone had been manipulated by his daughter, Shari Redstone.

Dauman and Abrams sued the elder Redstone in a Boston court, challenging his competence and questioning the motives of a new cast of lawyers, spokespeople and advisers -- a pattern repeated in response to other tussles between Viacom’s board and its controlling shareholder. Viacom will pay their legal fees in the case, according to a June 13 indemnification agreement.

Salerno wants a Delaware judge to order that the current board remain in place while litigation over its ouster continues. Redstone sought the same thing, but asked that targeted directors be barred from “taking any action outside of the ordinary course of business,” according to court filings.

“With his decline in health, Shari has placed Mr. Redstone’s decades-long plan to run Viacom as an independently controlled and professionally managed company in jeopardy,” Salerno wrote. “Sensing an opportunity presented by her father’s severely impaired mental and physical condition, and unsatisfied with the limited role for her at her father’s companies that he envisioned, Shari has implemented a scheme to wrest control of Viacom in contravention of Mr. Redstone’s well-established desires.”

Potential Successor?

National Amusements left a few hints as to what would happen if the Delaware court approved its new board members by not replacing Tom Dooley, Viacom’s Chief Operating Officer. That puts Dooley in line to succeed Dauman. Dooley stands to receive more than $60 million if the board votes to replace Dauman and doesn’t offer him the top job.

Investors have cheered at every indication a change was coming. The stock has risen 18 percent since Redstone first moved against Dauman, his long-time ally.

“Wall Street wants this company to be sold or managed by someone else,” said Laura Martin, an equities analyst with Needham & Co.

Dauman has been at Redstone’s side for the better part of three decades, orchestrating mergers and creating his media empire. As Redstone fired executive after executive and fought with his family in public, Dauman rose from lawyer to deputy to prodigal son.

Battling YouTube

Redstone brought Dauman in to run Viacom in September 2006 after firing Tom Freston, a popular executive who worked at MTV in its earliest days and created many of Viacom’s current cable networks. Viacom thrived for a few years under Dauman, but in recent years struggled to reach young viewers flocking to web outlets like YouTube.

The elder Redstone’s influence on Viacom re-emerged, at least via intermediaries, after Dauman announced plans in February to sell a stake in Paramount Pictures and slashed his pay to zero.

‘Stern Warning’

“The Redstone contingent initially may have intended for their actions to constitute a stern warning to Mr. Dauman not to pursue a strategic transaction involving Paramount,” lawyer Oved said. “However, when Mr. Dauman doubled down on his efforts to oppose the Redstones, and the markets began reacting positively to the possibility of a shakeup at Viacom, as evidenced by the stock’s performance of late, the entire process seemed to take on a life of its own.”

While Dauman and Redstone wait to see how the courts resolve their dispute, one observer has already adjudicated. Wikipedia lists Dauman as the former chairman and chief executive officer of Viacom.

To contact the reporters on this story: Lucas Shaw in Los Angeles at [email protected] ;Jef Feeley in Wilmington, Delaware at [email protected] To contact the editors responsible for this story: Crayton Harrison at [email protected] ;Brian Bremner at [email protected] Jason Gale

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